q Savings accounts
If you would like your money to earn a better rate than onshore building societies and banks are offering, but you cannot stand to risk losing a penny, try offshore deposit accounts.
These operate exactly like their onshore counterparts, except that interest is credited gross to your account. This allows your savings to "compound" - you earn interest on the interest you have already earned.
You do have to declare the interest you earn each year on your tax return and pay the tax due. But you can defer the tax liability by having the gross interest capitalised on your account on 1 May. That means you will not have to declare your interest until April the following year, and the tax bill is due several months after that. You can also postpone your tax bill indefinitely by saving in a roll-up fund which pays no dividend but provides investment return as growth only. This is seen by the tax office as investment gain rather than income, so there is no income tax to pay. You may have to pay capital gains tax, but only when you bring it back to the UK.
Most major UK banks and building societies have offshore branches or subsidiaries offering deposit accounts. Many accounts demand high minimum balances but there are still some good rates available for those with modest savings (see table, below).
q Investment funds
If you expect your money to work a little harder for you and you can accept a higher level of investment risk, you can invest in an offshore fund. There are hundreds of investment funds to choose from - Guernsey alone has 383. But only those approved by the Financial Services Authority are allowed to be advertised for sale in the UK.
Offshore funds are similar to UK investment trusts or unit trusts where investors' money is spread across a range of stock market investments. They are either open-ended like unit trusts or closed-ended like investment trusts. Offshore Oeics (open-ended investment companies) - which operate as combined unit trusts and investment trusts - are becoming more common.
What sets offshore funds apart from their onshore counterparts is that investors have to pay a performance fee to the fund management company if it can outperform a set performance target. In theory this encourages the fund manager to exceed investors' fund performance expectations - but the funds themselves are still subject to the same risks and fluctuations as onshore funds.
If you do decide to invest, any gains you make will be free of capital gains tax liability while your investment remains offshore. As soon as you want to use the cash and bring it back to the UK, it is potentially liable for capital gains tax. However, you can defer this for as long as you wish and benefit from reinvestment of the gain year on year - rather like benefiting from earning "interest on the interest" on an offshore savings account.
Those happy with a higher level of risk may want to consider money funds, which pool investors' money to qualify for wholesale exchange rates on the international money markets. Each currency is represented by its own class of share and the price varies according to the underlying interest rates.
Money funds are vulnerable to rises and falls in international exchange rates, so they are not for the risk-averse. They share the same tax liability as offshore investment funds - any capital gains must be declared and the capital gains tax (if any) paid once the investment is brought back to the UK. (We can make gains of pounds 6,800 in this tax year, tax-free.) If you receive the return on any fund as income, it must be declared on your tax return.
q Multi-currency cheque accounts
If you own property or work abroad, or you need to make regular payments in more than one currency, an offshore multi-currency account allows you to write cheques in a variety of currencies. The accounts operate just like onshore current accounts - though with much higher minimum balances - and the money held in your account also earns interest tax- free.
You have to declare the interest annually on your tax return, but you still benefit from compounded gross interest. And because these accounts allow you to switch your money between currencies, you can exploit the best exchange rates available. But when the Euro currency starts on 1 January 1999, these accounts will be killed off unless they convert into American dollars.
q Kathleen Hennessy is assistant editor of `Moneywise' magazine.
Where do you live?
The amount of tax you have to pay on any income earned abroad (including offshore) depends on your residency status.
Broadly speaking, this complex term applies to the place where an individual has his or her permanent home. It is distinct from nationality or residence and usually follows the domicile of your father. So if you were born in the UK but your father is Polish, for example, you could be deemed Poland domiciled. However, if you spend more than 17 out of any 20 years in the UK, you are domiciled here.
Anyone who spends 183 days or more of the tax year in the UK is regarded as resident for tax purposes. Days of arrival and departure are not included in this total. Anyone spending less than 183 days may be still treated as resident if he or she makes regular visits to the UK averaging three months or more for four consecutive years.
If you live in the UK year in, year out you are classed as ordinarily resident. So someone who goes abroad for a period that includes a full tax year may still be treated as ordinarily resident for the year of absence even while not physically here.
Best offshore accounts
The table ranks the best rates available on a variety of balances in offshore deposit accounts as at 1 August1998
Account Minimum Rate (%)
Woolwich International pounds 500 6.40
Derbyshire 90 Day Notice pounds 1,000 6.25
Britannia 90 Day Notice pounds 5,000 7.30
Bank of Scotland Instant Access Savings pounds 5,000 7.25
Britannia 90 Day Notice pounds 10,000 7.85
First National 60 Day Notice Postal pounds 10,000 7.80
First National 60 Day Notice Postal pounds 25,000 7.95
Cheshire Offshore 60 pounds 25,000 7.90
Offshore best funds
The table ranks the best performing offshore funds over the past year. All funds are approved for sale in the UK by the FSA.
Fund Return (%)
Lazard UK Equity GBP 221.07
0171 448 2363
Invesco European Warrant 169.33
Groupe Indosuez Italy 85.73
00 352 47 671
Schroder Intl Select Italian Equity 79.91
00 352 3413 42 212
CU Privilege Portfolio Italian Growth 78.20
00 352 40 2820 261
Source: Standard & Poor's Micropal. Percentage returns are based on pounds 1,000 invested over one year to 27 July 1998 on a bid to bid basis, gross income reinvested, sterling converted.Reuse content